When a trader submits an order, it doesn’t automatically go to a single exchange. Instead, the broker must decide which venue will provide the best price, fastest fill, or highest likelihood of execution. This decision-making process is called order routing.
Modern markets are fragmented, with dozens of places where trades can happen: major exchanges (NYSE, NASDAQ), electronic communication networks (ECNs), alternative trading systems (ATS), dark pools, wholesalers, and market makers. Each venue offers different liquidity, spreads, and execution quality. Smart order routers track all of this in real time, scanning the market for the best available opportunity.
Order routing is guided by regulations like best execution, which require brokers to act in the customer’s best interest. Routing decisions consider price, speed, fees, liquidity, order type, and fill probability. Complex algorithms and high-speed systems make these choices automatically, often in microseconds, to ensure traders receive the most favorable outcome.
Order routing matters because where an order is sent can significantly impact execution price, speed, and quality. Efficient routing leads to tighter spreads, lower slippage, and better overall trading results.
Brokers evaluate several factors: the best available price (NBBO), liquidity at each venue, historical fill rates, execution speed, and transaction costs. Smart routers analyze this data in real time and direct the order to the venue offering the most favorable combination. These decisions often occur in tiny fractions of a second.
With trading spread across multiple exchanges and dark pools, no single venue reflects the entire market. Routing becomes essential to avoid missed opportunities or poor fills. Proper routing helps traders access deeper liquidity, reduce slippage, and capture better prices across venues that differ in spreads, volume, and volatility.
Some brokers receive compensation from market makers for routing retail orders to them. While this can lower trading costs for customers, it raises concerns about potential conflicts of interest. Regulatory rules require brokers to still provide best execution, meaning routing decisions must balance price improvement, cost savings, and customer protection.
A retail trader submits an order to buy 100 shares of a stock. The broker’s smart router scans NYSE, NASDAQ, Cboe, and multiple dark pools. It finds the best price in a dark pool and routes the order there, filling it slightly below the NBBO—providing a small price improvement.
